The effectiveness of the nse 20 share index in representing the overall market performance at Nairobi security exchange

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Abstract

The stock market movements are constantly monitored and pursued in the global,
regional and local context. Particularly the movement and fluctuations of related
standard indices which represent a tool to measure market performance and outcomes
of the market in terms of growth are closely evaluated. The indices show registered
share prices in the market. Again, they are used as comparable performance indices
which investors can use to measure the performance of their portfolios compared to
that of the whole market. The NSE 20 share index has been a victim of criticism from
majority of investors and investment analysts due to its inherent shortcomings that
make it a weak performance measurement indicator. As a result, the NSE introduced
the NASI in February 2008 as a complimentary index. The study sought to investigate
the effectiveness of the NSE 20 share index in representing the overall market
performance at the NSE. The study‟s specific objective is to investigate which of the
two indices between the NASI and the NSE share index is a better performance
measurement indicator. The sample of the study included all the firms that form the
NSE 20 share index and NASI. The index was selected from companies in the NSE
from all sectors namely Agricultural, Automobiles and Accessories, Banking,
Commercial and Services, Construction and Allied, Energy and Petroleum, Insurance,
Investment, Manufacturing and allied and Telecommunication and Technology. This
was an empirical study and required secondary data on NASI and NSE 20 share index
for the period January 2013 to December 2013 which was obtained from the NSE
information centre. Correlation analysis was also carried out to determine if
significant correlation exists between the two indices with market performance. From
the correlation analysis there is a strong positive correlation of 0.822 between market
performance and NASI and a rather stronger positive relationship of 0.861 between
market performance and the NSE share index. The findings of the study indicate that
there is no significant difference between the two indices also the NSE 20 share index
is a better market measurement index compared to the NASI. Generally the NSE is
effective as a measure of the market performance although in the future there should
be an index to measure each market segment.